Morgan Stanley & Governance Practices March 2013
Notice The information provided herein may include certain non-gaap financial measures. The reconciliation of such measures to the comparable GAAP figures are included in the Company s Annual Report on Form 10-K for the year ended December 31, 2012 ( 2012 Form 10-K ), which is available on www.morganstanley.com. The endnotes on page 15 are an integral part of this presentation. This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forwardlooking statements, which speak only as of the date on which they are made, which reflect management s current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of risks and uncertainties that may affect the future results of the Company, please see the Company s Annual Report on Form 10-K for the year ended December 31, 2012. The statements in this presentation are current only as of their respective dates. 2
Executive Summary Morgan Stanley s Board of Directors unanimously recommends that shareholders vote FOR the following four compensationrelated proposals: 1. Non-binding advisory vote approving compensation of named executive officers ( Say on Pay ) In 2012, Morgan Stanley s, Management Development and Succession (CMDS) Committee completed a comprehensive review of the level and structure of CEO compensation to ensure alignment with best practices. In keeping with its commitment to tie executive compensation to Company and individual performance, Morgan Stanley determined to both reduce the CEO comprehensive pay opportunity and subject a greater amount of it to future performance conditions CEO comprehensive pay opportunity consisted of $6,000,000 actual 2012 annual performance compensation (all deferred/subject to clawback, except salary) and a $3,750,000 target 2013-15 long-term incentive award subject to future performance conditions $9,750,000 comprehensive 2012/13 pay opportunity was 7% lower than $10,500,000 comprehensive pay opportunity for 2011 As reported in the Summary Table which h reflects current year cash and equity awarded d for the prior year, CEO compensation declined 18% for 2012 2. Increase the number of shares available for grant under the 2007 Equity Incentive Plan (EICP) by 30 million shares The Company is requesting 30 million shares in 2013 versus 50 million in 2012 We believe this amount is sufficient to maintain shareholder alignment, generally targeting the same mix as 2012 of 50% equity / 50% deferred cash for year-end deferred bonuses 3
Executive Summary (cont d) 3. Amend the EICP to better enable performance-based long-term incentive awards to qualify as tax-deductible to the Company under Section 162(m) of the Internal Revenue Code Morgan Stanley believes it is in the best interests of the Company and shareholders to grant executive compensation that is tax-deductible to the Company. In 2013, we adopted a new long-term incentive program as a more significant component of executive compensation and this amendment will better enable long-term incentive compensation to be tax-deductible to Morgan Stanley 4. Update the definition of pre-tax earnings in the Company s existing Section 162(m) performance formula that governs annual incentive compensation to more accurately reflect operating performance The existing 2001 performance formula imposes a maximum annual bonus of 0.5% of pre-tax earnings (as defined) for each designated officer Proposal to exclude the impact of debt valuation adjustments (DVA) to better align formula with operating performance, and to update in line with current accounting literature Morgan Stanley s Board of Directors unanimously recommends that shareholders vote FOR the election of all director nominees and the ratification of Deloitte & Touche LLP s appointment as our independent auditor 4
BU or Client/Project 1. Say on Pay In 2012, CMDS Committee Conducted Comprehensive Review of CEO to Ensure Consistency with Best Practices (1) 1 CEO Annual Performance Set target annual performance compensation amount based upon competitor benchmarking. Actual award granted for 2012 performance was relative to that target 2 CEO Long-Term Incentive Established new performance-based long-term incentive program for 2013-15 as a more significant element of compensation, also based on competitor benchmarking 3 CEO Base Salary Increased CEO s base salary, based upon market rates to achieve better balance between fixed and at-risk variable compensation; effective in 2013 4 Other NEOs The compensation levels and structure for the other NEOs were changed in a manner consistent with the changes made for the CEO Note 1. In consultation with independent compensation consultant, Pay Governance 5
BU or Client/Project 1. Say on Pay Target for Morgan Stanley s CEO Was Informed by the 2011 at Peer Firms Benchmarking 2011 CEO (1) MS CEO 2012/13 Comprehensive Pay Opportunity Target $ Million $ Million $15 - $16 $13 - $14 $13.75 ~$12 $3.75 ~$10 $10.00 12 Financials in S&P 100 Five Large U.S. Banks Annual Performance Excluding Long-Term Incentives 12 Financials in S&P 100 Five Large U.S. Banks Annual Performance Plus Long-Term Incentives at Target Value Target 2012 Annual Performance 2013-15 Long-Term Incentive at Target Value Target 2012 Annual Plus 2013-15 Long- Term Incentives Note 1. Statistics represent both the average and the median CEO compensation for peer firms which were equal 6
BU or Client/Project 1. Say on Pay Actual 2012 CEO Annual Performance Was 40% Below Target Based on the CMDS Committee s Assessment of Morgan Stanley s Performance Evaluating CEO Performance in 2012 Financial Performance Factors Included: Net revenues were $26.1 billion, net income $68 million, and ROE 0.1% $ Million MS CEO 2012 Annual Performance Excluding DVA, net revenues were $30.5 billion, net income $3.2 billion, and ROE 5.2% Total shareholder return was 28% above the 23% median of S&P 500 Financials, but below the 36% median for Morgan Stanley s nine largest global competitors While 2012 financial i performance was subpar, the Company made significant strategic progress: $10 (40%) Completed integration of legacy Morgan Stanley and Smith Barney Wealth Management platforms $6 Increased Morgan Stanley Wealth Management ( MSWM ) pretax margin from 11% in Q1 to 17% in Q4 Increased ownership to 65% of MSWM JV, and fixed price for purchase of the remaining stake, subject to regulatory approvals Reduced Basel III Risk Weighted Assets in Fixed Income and Commodities from $390 billion in the second half of 2011 to $280 billion at year-end end 2012 Achieved top-two rankings globally in announced Mergers and Acquisitions, Equity Underwriting, and Equities Sales and Trading wallet share Successful company-wide cost reduction efforts, including reducing employee headcount from 61,546 at the beginning of 2012 to 55,529529 as of January 31, 2013 2012 Annual Performance Target 2012 Actual Annual Performance Awarded (1) (1) Note 1. Does not include long-term incentives 7
BU or Client/Project 1. Say on Pay $000s CEO 2012/13 Comprehensive Pay Opportunity Includes a Long-Term Incentive Component, In Addition to 2012 Annual Performance MS CEO 2012/13 Comprehensive Pay Opportunity Elements $9,750 3,750 3,750 Ultimate realizable value determined based equally on two performance metrics over three years (2013-15): 15) (a) Target average ROE of 10% and (b) Target Morgan Stanley s Total Shareholder Return (TSR) equal to the S&P Financials Index Can range from 0 2x target, depending on performance Subject to clawback Deferred Equity Deferred Cash $6,000 2,625 2,625 2,575 2,575 100% deferred, vesting over three years Subject to clawback Options, rather than restricted stock units, utilized to preserve taxdeductibility to the Company under Section 162(m) Company credit spreads improved (tightened) dramatically, leading to reporting of $(4.4) billion of DVA Morgan Stanley Section 162(m) performance formula for taxdeductibility to the Company adopted in 2001 prior to DVA concept If DVA had been excluded from Section 162(m) formula, taxdeductible restricted stock units could have been granted 100% deferred, vesting over three years (previously two-year vesting) Base Salary 800 800 Subject to clawback 2012 Annual Performance 2013-15 Long-Term Incentive at Target Value 2012 Annual Performance Plus 2013-15 Long-Term Incentives 8
BU or Client/Project 1. Say on Pay Overall, the Proportion of CEO 2012/13 Comprehensive Pay Opportunity Delivered Through Future-Oriented Performance-Based Equity Awards Increased Substantially MS CEO Comprehensive Pay Opportunity 2010 2012 $000s No Current Cash Bonus No Current Cash Bonus Future-Oriented, Performance-Based Equity Award At Target Value Deferred Equity $14,000 1,940 7,380 14% (25%) $10,500 1,940 5,044 18% (7%) $9,750 3,750 38% Future-Oriented, Performance-Based Equity Award At Target Value 2,625 Deferred Cash Current Cash Bonus Base Salary 2,328 1,552 800 2,716 2,575 800 800 Viewed through the Proxy Summary Table, CEO compensation declined more steeply in 2012 2010 2011 2012 (2) Summary Table View (1) $15,186 (15%) $12,982 (18%) $10,672 Note 1. The Summary Table view presents cash compensation for the current year (base salary, cash bonus, and deferred cash bonus) and equity awards granted in January of the current year for prior year performance (i.e., 2012 compensation includes equity awards granted in January 2012 as part of the 2011 compensation process) 2. Plus 2013-15 long-term incentive opportunity 9
BU or Client/Project 1. Say on Pay Summary of 2012 Annual Performance Plus 2013-15 LTIP for Morgan Stanley CEO and NEOs Element Note 1 Comprehensive pay opportunity reduced from 2011 CEO 2012/13 comprehensive pay opportunity reduced 7% from $10.5 to $9.75 million. On a Summary Table basis, 18% reduction from $13.0 to $10.7 million 2 Increased proportion tied to future performance for shareholders Long-term incentive award increased from 18% of total CEO comprehensive pay opportunity for 2011 to 38% for 2012/13 3 No current bonus 100% of CEO 2012/13 comprehensive pay opportunity excluding base salary is deferred over three years with payments scheduled May 2013 Dec 2015 for deferred cash 4 Equity-based compensation 71% of CEO 2012/13 comprehensive pay opportunity excluding base salary is equity-based 5 Prohibited from hedging, g, selling short, or trading derivatives NEOs and other Operating Committee members are prohibited from engaging in hedging strategies, t selling short or trading derivatives with Company securities 6 Share retention requirement NEOs and other Operating Committee members must retain at least 75% of equity awards granted (less allowances for option exercise and taxes) for service on the Operating Committee 7 Clawbacks All deferred compensation subject to clawbacks 8 Change in control No automatic vesting on change in control. Double trigger in place since 2007 (i.e., change in control and termination within 18 months of change in control required for vesting) 10
BU 2. EICP or Share Client/Project Request Proposal Overview of EICP Share Request Proposal Proposal The Board of Directors recommends adding 30 million shares to the EICP in 2013 Rationale Morgan Stanley believes that a portion of employee compensation should be awarded in shares to align employee and shareholder interests. For 2012, generally 50% of deferred bonuses awarded in shares 82% of voting shareholders approved adding 50 million shares to the EICP in 2012 The Company strives to maximize employee and shareholder alignment, while minimizing dilution. Thus, the Company is requesting 40% fewer additional shares in 2013 (30 million) than in 2012, when we requested 50 million additional shares. Fewer additional shares are necessary in 2013 for several reasons including: the Company s stock price has increased, the Company has reduced the number of employees, and more shares are available at the start of the year than in the prior year Overhang (1) Burn Rate (2) 17.8% 15.2% 12.4% 3.3% 3.1% Impact 2011 2012 Pro-Forma 2011 2012 for Issuance 3 Year Average as of 3 Year Average as of Year End of 30MM Year End Shares as of 2/28/2013 Notes 1. Overhang equals the number of shares outstanding from prior grants and available for future grants as a percent of common shares outstanding 2. Burn rate equals the number of shares granted per year as a percent of average common shares outstanding for the period 11
BU 3, 4. Corporate Client/Project Tax- Deductibility of Executive Under Section 162(m) Overview of Proposals to Make Certain Amendments to Provide for Corporate Tax-Deductibility of Executive Under Section 162(m) of the Internal Revenue Code A Amend EICP to Better Enable Long-Term Incentive Awards to Qualify as Tax-Deductible to the Company Under Section 162(m) (1) B Update the Definition of Pre-Tax Earnings in the Company s Existing Performance Formula that Governs Annual Incentive to More Accurately Reflect Operating Performance (1) Proposal The CMDS Committee adopted a new long-term incentive program (LTIP), with future-oriented performance-based compensation becoming a more substantial component of the comprehensive pay opportunity for senior executives The request to add performance measures that could be elements of this LTIP program over time will better enable long-term incentive compensation to be taxdeductible to Morgan Stanley Annual grant cap of $10 million per officer per year Proposal Amend formula for annual incentive compensation that is tax-deductible to the Company (each designated participant may be paid a maximum annual incentive of 0.5% of Morgan Stanley s pre-tax earnings) to: A) Remove the impact of DVA from the calculation of pre-tax earnings B) Bring definition of pre-tax earnings current with other GAAP accounting literature Rationale Morgan Stanley believes it is in the best interests of the Company and shareholders to grant executive compensation that is tax-deductible to the Company In 2013, the CMDS Committee adopted a new LTIP as a more significant component of executive compensation and this amendment better enables LTIP awards to qualify as tax-deductible Rationale Morgan Stanley believes excluding the impact of DVA better aligns formula with operating performance If the Section 162(m) formula had excluded DVA, Morgan Stanley would have been able to grant restricted stock units that were tax-deductible to the Company rather than tax-deductible options as an element of executive compensation for 2012 Note 1. If approved, the Section 162(m) amendments described herein will be effective for performance periods beginning on or after January 1, 2014 12
BU 5. Additional or Client/Project Information (Approach to ) For 2012, Morgan Stanley Continued to Refine Its Overall Structure Consistent With Sound Risk Management and Regulatory Guidance Best Practice 2012 Refinements Composition Morgan Stanley believes that equity ownership by employees aligns interests with shareholders, and that bonus deferrals, subject to clawbacks, make for sound risk management Several regulators have suggested that bonuses should be at least 50% paid in equity For 2012, Morgan Stanley generally increased the equity component of deferred bonuses to 50%, up from 33% in 2011 Deferral Period Deferral periods should be long enough to permit effective clawback reviews Several regulators have suggested at least three years For 2011, deferred equity vested over three years, but deferred cash over two years For 2012, Morgan Stanley extended the vesting schedule so that both deferred equity and deferred cash vest over three years Clawback Best practice for sound risk management includes clawback reviews for damage or loss to the Company as a result of failure of risk management or breach of policy At year-end 2011, Morgan Stanley implemented a new, enhanced process for identifying, evaluating, and taking actions on potential clawback situations including reviews by each of four control functions In 2012, these clawbacks reviews were conducted quarterly, in addition to year-end 13
BU 6. Additional or Client/Project Information (Corporate and Risk Governance Highlights) Morgan Stanley Has Significantly Strengthened Its Corporate and Risk Governance in Recent Years and Is Committed to Maintaining Best in Class Governance Practices Charter Documents Shareholders who own at least 25% of common stock have the ability to call a special meeting of shareholders Eliminated i all supermajority vote requirements All directors elected annually by majority vote standard No poison pill Composition of Board Majority of independent directors Board has financial services experience and diverse international background Lead independent director appointed, and reviewed annually, by other independent directors Board policy favors committee rotation Risk Governance Risk Committee of Board established January 2010 Chief Risk Officer reports to CEO and Risk Committee and regularly reviews risk matters with the Audit Committee, Risk Committee, Operations and Technology Committee and Board Chief Risk Officer reviews incentive compensation arrangements with, Management Development and Succession Committee to confirm they do not encourage excessive or unnecessary risk-taking Chief Risk Officer also involved with review process for identifying and evaluating situations occurring that could require clawback or cancellation of previously awarded d compensation 14
Endnotes The following notes are an integral part of the Company s financial and operating performance described in this presentation: A detailed analysis of the Company s financial and operational performance for 2012 is contained in the Management s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2012 Form 10-K Total shareholder return is the change in share price over a period of time plus the dividends paid during such period, expressed as a percentage of the share price at the beginning of such period DVA represents the change in fair value of certain of the Company s long-term and short-term borrowings outstanding resulting from the fluctuation ti in the Company s credit spreads and other credit factors Pre-tax profit margin and results excluding DVA are non-gaap financial measures that the Company considers useful measures for the Company and investors to assess operating performance and capital adequacy. For further information regarding these measures, please see pages 54-56 and 68 of the 2012 Form 10-K The Company estimates its Basel III RWAs based on a preliminary analysis of Basel III guidelines published to date and other factors. This is a preliminary estimate and subject to change The Company s capital markets rankings are reported by Thomson Reuters as of January 18, 2013 for the period of January 1, 2012 to December 31, 2012. Equity Sales and Trading wallet share is based on the sum of the reported revenues for the equity sales and trading businesses of Morgan Stanley and the companies within the Comparison Group (Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, UBS, and Wells Fargo), excluding Wells Fargo; where applicable, the reported revenues exclude DVA 15